HealthEquity, Inc.

Good afternoon and welcome to the Health Equity Second Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note, this event is being recorded. I would now like to turn the conference over to Richard Putnam. Please go ahead.

Thank you, Gary. Appreciate it. I appreciate you hosting us today. Hello, everyone. Thanks for joining us this afternoon. As Gary said, this is Health Equity's second quarter of fiscal year 2026 earnings conference call. My name is Richard Putnam. I do Investor Relations for Health Equity. Joining me today is also Scott Cutler, President and CEO, Dr. Steve Nealeman, Vice Chair and Founder of the company, and James Lucania, Executive Vice President and CFO. Hello. Before I turn the call over to Scott for prepared remarks, we note that a press release announcing the financial results of our second quarter of fiscal 2026 was issued after the market closed this afternoon. These financial results include certain non-GAAP financial measures that we will reference today. You can find a copy of today's press release on our investor relations website, which is ir.healthequity.com. and it will also include the reconciliation of these non-GAAP measures with comparable GAAP measures. We also note that our comments and responses to your questions today reflect management's view as of today, September 2nd, 2025, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business, which could affect the forward-looking statements made today. These forward-looking statements are subject to risk and uncertainties that may cause our actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risk that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10-K and any subsequent periodic reports filed with the FCC. We assume no obligation to revise or update these forward-looking statements in light of new information. With that out of the way, let's get on with this. Now over to Scott Cutler.

Thanks, Richard, and welcome, everybody. For the last 10 years or so, health equity has traditionally reported our second fiscal quarter of the day after Labor Day. For many, this day is the first unofficial day of the fall season, which means getting kids back to school, football, leaves changing colors, and the welcome relief of cooler weather. For Team Purple, it is the start of our busy growth season. But before previewing the preparations we have made, For our busy season, I will discuss the key metrics reflecting a strong start to fiscal 2026. Steve will provide details on HSA expanding provisions included in the budget bill passed in July, and Jim will detail Q2 financial results and our raised outlook for fiscal year 26. The team again delivered strong year-over-year growth and margin expansion across our key metrics in Q2, including revenue up 9%, Net income up 67%, adjusted EBITDA up 18% to an all-time quarterly company high that also included record gross margin of 71%, and near record adjusted EBITDA margin of 46%. HSAs grew 6%, CDB accounts grew 4%, driving total accounts up 5%, and HSA assets were up 12%. Health equity ended Q2 with over 17 million total accounts, including net CDB account growth of 255,000 year-over-year and just under 10 million HSAs, holding over 33 billion in HSA assets. HSA assets increased 3.7 billion year-over-year. The number of our HSA members who invest grew by 10% year-over-year, helping to drive invested assets up 23% to $16.1 billion. HSA cash reached $17 billion. The average balances of our HSA members grew by 6% year over year. From a macro perspective, after accounting for adjustments, the labor market is underperforming relative to expectations and softer than the pace of hiring in calendar 2024 and 2023. Despite this macro environment, Team Purple opened 163,000 new HSAs from sales in the quarter. Early indicators of this year's selling season show strong new enterprise wins, as well as retention of our existing clients. We also continue to see signs that more SMB companies are adopting HSA-qualified health plans, improved data analytics, combined with upsell or cross-sell opportunities, are helping our sales and relationship management teams deliver market-leading tools to help employers manage health care costs that continue to grow at two to three times the growth in wages. We are in a unique position to benchmark and recommend the most effective components of health plan plus HSA design, given the size of our data set and our expertise across client engagements. Powered by our analyzer tool and expert consultants, these recommendations can maximize health plan and tax savings for the employer while increasing healthcare affordability for their employees. We continue to see better benefits plan cost performance for clients with higher HSA adoption rates within our client base. We are pleased to see a number of clients utilizing health payment accounts, or HPAs, in connection with higher HSA adoption providing members with an added safety net when first starting their HSA journey. Team Purple also made great progress expanding our member-first secure mobile experience during the quarter while reducing our cost to serve. Since launching our award-winning expedited claims, which uses AI technology to automate claims adjudication, we have processed millions of dollars in reimbursements. while driving member satisfaction scores up and reducing processing costs. This is just the beginning of our AI journey and a new phase to our service modernization. We expect to further leverage agentic AI in our voice channel to drive greater automation and enhance the member experience, accelerating service delivery to our members and accurately addressing their needs and questions while reducing call wait times. These expanded AI service capabilities can potentially accelerate our efforts to further drive down our service costs. Over this past year, we have increased our service levels, reduced the fraud impacting our members, and launched expedited claims, which all enhance the members' experience, with 9% fewer teammates this year compared to a year ago. We also celebrated the completion of moving our V5 platform to be 100% cloud-based this quarter, resulting in 92% faster response times, five times more stability to the platform, and an 80% reduction in delays. We are very pleased with our team's efforts to drive down successful fraud attacks on our HSA members. Under the direction of Sunil Seshadri, our Chief Security Officer, and his dedicated security and fraud teams, we launched a number of added security measures, including greater adoption of our member-first secure mobile experience app, which now boasts 1.7 million downloads, to reduce direct fraud service costs from 3 million in Q1 to an exit run rate in Q2 near our goal of one basis point of total HSA assets per year. The first phase of additional PASCIE authentication capabilities was rolled out during the quarter and we anticipate that many of our members will authenticate through this Passkey technology by the end of the year. The introduction of Passkey will enhance trust and improve the login and authentication experience across our platforms, with the benefit to our members of a streamlined login process and no longer being required to remember passwords. We continue to see lower sequential fraud each month this year, as our controls take hold and more of our members move to a secure mobile experience. We are committed to continually updating our defenses as threats evolve. We are optimistic about the actions taken thus far and the continued strengthening and implementation of controls. These experience enhancements are part of HealthEquity's broader strategy shift to consumer experiences to secure our consumer-centric mobile app. As part of the Mobile First strategy, new members who sign up through their employer's open enrollment process will be able to set up their HSA account through the Health Equity mobile app. This process will be faster, seamless, and secured with industry-leading passkey technology. On the legislative front, the budget bill passed in early July delivered a number of wins for HSAs. Steve and our government affairs team did a remarkable job of educating our legislators and their staff about the benefits of HSAs and the growing demand for greater access to them from American families. Thank you, Steve, for your leadership in this effort. Please help us understand what this means for this year and beyond.

Thank you, Scott. It has been a busy and exciting time this summer for our team in Washington. The budget bill that was passed and signed into law in July included key provisions that expand the use of HSAs, granting wider access to more American families. The bill expanded the market for HSA adoption by allowing direct primary care, or DPC, arrangements and the use of low-cost telehealth before consumers meet their deductibles. Both of these provisions have been popular with health plans and employers to provide greater access to lower-cost healthcare for consumers while keeping overall costs for payers in check. Previously, DPC and low-cost telemedicine were both disqualifying plan design elements for HSA eligibility. These provisions provide employers more flexibility in plan design and greater access to affordable health care. We expect these changes will help our partners and clients drive greater HSA adoption. The bill also significantly expands HSA eligibility for individuals and families who purchase health insurance offered on ACA exchanges. All individual bronze and catastrophic plans will be allowed to be coupled with HSAs beginning January 1, 2026. There are currently over 7 million people enrolled in bronze health plans. Approximately 90% of these plans are not eligible to open HSAs. This will change in January, and our teams are working hard to capitalize on this opportunity. Furthermore, with subsidies on the exchanges being reduced or going away, higher health care trend rates driving up premiums, the added benefit of funding out-of-pocket expenses to an HSA, and the lower cost bronze premiums, This may all lead to more people opting into these plans. We believe HealthEquity is uniquely positioned to deliver with our network partners a streamlined enrollment process that can help bronze plans enrollees easily enroll in HealthEquity HSAs to benefit from our industry-leading solution. In addition, targeted consumer marketing campaigns in key markets will raise awareness of new eligibility benefits. Health Equity is building a redesigned enrollment and onboarding experience for all HSA-qualified individuals, including the new bronze and catastrophic plan consumers. This new redesign will provide faster, secure, and mobile responsive experience to sign up for an HSA in a seamless funding process. Because of these changes in the OBDD, we believe these provisions could allow three to four million more American families to have access to the remarkable benefits of HSAs. This is the largest expansion of the regulatory framework for HSAs in the last 20 years. These changes will make it easier for employees to offer and promote HSAs. These provisions are a good down payment by our legislators to help all Americans have personally owned health accounts. We will, of course, continue to work hard to educate legislators and regulators on the benefits of HSAs and continue to press for a number of other HSA market-expanding provisions. We remain confident that tax-advantaged health accounts like HSAs that help consumers pay for their out-of-pocket costs are popular on both sides of the political aisle, and we will continue to advocate for all Americans to have access to them. Now, I'll pass time over to Jim to discuss our financials. Jim.

Thanks, Steve. Before I jump into the financial review, I just want to echo Scott and personally thank Steve and our government affairs team for the awesome job they did helping us Our lawmakers better understand the value of HSA plans and the impact they have in making health care for American families more affordable. Great job to Steve and the team. Now let's talk about our second quarter, fiscal 2026 gap and non-gap financial results. As always, we provide a reconciliation of gap measures to non-gap measures in the press release. Second quarter revenue increased 9% year over year. Service revenue increased 1% to $117.9 million. Custodial revenue grew 15% to a record $159.9 million in the second quarter. The annualized yield on HSA cash was 3.51% for the quarter as a result of higher replacement rates and continued increase in balances and number of accounts participating in enhanced rates. Interchange revenue grew 8% to $48.1 million, notably faster than the 5% total account growth. as members increased both contributions and distributions with more payments on platform versus requesting cash reimbursement for payments made off platform. Gross profit of $232.6 million was a record 71% of revenue in the second quarter, up from 68% in the second quarter last year. Service costs declined year-over-year in the quarter, both on a reported basis and excluding fraud and fraud accruals. The second quarter included approximately $1.2 million of fraud reimbursements to members, and we had a net release of our fraud reserve of approximately $1 million in the quarter. As Scott mentioned, we remain on pace to achieve our goal to exit fiscal year 26 with a run rate of one basis point of total assets in fraud costs per annum. We continue to invest in fraud prevention and detection capabilities and drive higher adoption of our secure mobile experience. and we believe these efforts will normalize fraud impact on service costs in the second half of fiscal year 26. As Scott mentioned earlier, the actions taken during our first half of this fiscal year to drive efficiency in our operations. We exited the quarter with 9% fewer teammates compared to the prior year and expect to carry those savings into fiscal year 27. Net income for the second quarter was $59.9 million, or $0.68 per share, on a GAAP EPS basis, Non-GAAP net income was $94.6 million, or $1.08 per share. Adjusted EBITDA for the quarter was $151.1 million, up 18% compared to Q2 last year, and adjusted EBITDA as a percentage of revenue was 46%, near an all-time record for us and up compared to 43% in the second quarter last year. Turning to the balance sheet, as of July 31, 2025, cash on hand was $304 million, as we generated $200 million of cash flow from operations in the first half of fiscal 26. We ended the quarter with approximately $1 billion of debt outstanding net of issuance cost, after paying down $50 million of the revolver during the quarter. We also repurchased approximately $66 million of our outstanding shares during the quarter, and we have approximately $352 million remaining on our previously announced share repurchase authorizations. One provision in the budget bill that Steve did not discuss is the immediate tax deduction for domestic research and experimental expenses beginning in fiscal year 26. Our initial analysis indicates that accelerating these tax deductions may reduce our federal cash taxes paid over the next two fiscal years by $65 to $75 million. The corporate income tax provisions included under the budget bill will not materially impact our income statement, our earnings per share, or our forward income tax rate guidance, as the accelerated cash tax savings will be captured through deferred taxes on our balance sheet. However, this adds to our increased cash flow from operations to accelerate funding strategic growth and technology initiatives, debt pay downs, and stock repurchases. For the first six months of fiscal 26, Revenue was $656.7 million, up 12% compared to the first six months of last year. Gap net income was $113.8 million, or $1.29 per diluted share. Non-gap net income was $180.4 million, or $2.05 per diluted share. and adjusted EBITDA was $291.3 million, up 19% from the prior year, resulting in 44% adjusted EBITDA margin for the first half of this fiscal year. Before I detail our raised guidance and assumptions, let me give you an update on the interest rate forward contracts that we discussed in June during our Q1 earnings call. As a reminder of what we said in June, we expect that these contracts will have little to no impact on our fiscal year 26 income statement. they will further de-risk expected interest rate volatility on future HSA cash placement contracts, as we have in essence pulled forward the placement rate. We have entered into Treasury bond forward contracts during the quarter with a notional amount of $1.2 billion, tied to basic rate contract maturities between January 26 and January 27, with an average rate lock on the five-year Treasuries of just over 4%. This obviously does not include the negotiated premium that we receive above the five-year Treasury benchmark for both our basic rates and enhanced rates deposits. Historically, we've seen corporate spreads widen as Treasury yields decrease. We anticipate doing additional de-risking transactions over the remainder of fiscal year 26. We expect the average yield on HSA cash will be approximately 3.5% for fiscal 26. As a reminder, we base custodial yield assumptions embedded in guidance on projected HSA cash deployments and rollovers, the schedule of which is contained in today's release. We also consider and analysis the forward-looking market indicators, such as the secured overnight financing rate and mid-duration treasury forward curves. These are, of course, subject to change and are not perfect predictors of future market conditions. Our fiscal 26 guidance reflects the expected carry forward of the trajectories for revenue and margins the remainder of this year, including increased technology and security investments as we enhance our member-first secure mobile experience, deliver innovative products across the platform, and improve the member experience as we strive to drive our strategy of helping our members better save, spend, and invest for health care. We also expect additional investments in sales and marketing efforts that Steve discussed related to bronze plan HSA expansion. We, of course, will also be lapping last year's fraud impact on service costs in the second half as we continue to close attack vectors and help our members secure their assets. We expect revenue in a range between $1.29 and $1.31 billion. Gap net income in a range of $185 to $200 million. or $2.11 to $2.28 per share. We expect non-GAAP net income to be between $329 and $344 million, or $3.74 and $3.91 per share, based upon an estimated 88 million shares outstanding for the year. Finally, we expect adjusted EBITDA to be between $540 and $560 million. We continue to invest in protecting our members' assets and data while providing them with a remarkable experience. We're pleased with how we exited Q2 and look to make additional progress in the second half of 26 towards normalizing fraud costs to our target of one basis point on total HSA assets per annum. Our guidance includes additional expected share purchases under the remaining $352 million cumulative repurchase authorizations. and potential additional reductions in revolver borrowings during the fiscal year. With continued strong cash flows and available borrowings on our revolver, we will maintain ample capacity for portfolio acquisitions should they become available. We assume a GAAP and a non-GAAP income tax rate of approximately 25% and a diluted share count of $88 million, including common share equivalents. As we've done in previous reporting periods, our fiscal 2026 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release, and a definition of all such items is included at the end of the earnings release. In addition, while the amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is included. With that, let's go to the operator for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Our first question is from Brian Tanquillit with Jefferies. Please go ahead.

Hey, good afternoon, guys, and congrats on the quarter. Maybe just to follow up to your comments about the fraud, kind of like HSA fraud, are there any milestones that we have to achieve or sticking points you can address here that we're looking at as we think about the next few quarters in terms of that goal?

So I guess what I would say around fraud, the experience itself is that we've been driving towards the strategy of a member-first secure mobile experience. And the secure part is really important because, number one, we've been driving our members to an app that we introduced a year ago. We've already started rolling out Passkey, which Passkey is a more secure authentication method, but it also provides a better, more seamless experience for our members to be able to get onto the app. And so as we continue to roll out the app experience over the course of this year, the introduction of Passkey, we think it's going to result in an improved overall experience. And so as we look at the overall journey, it starts with the app. For us, as we look at the progress that we've made, as we highlighted just here previously, we've been making great progress under our fraud and security team, both top of funnel and bottom of funnel. We'll continue to make enhancements and improvements to the security and the fraud posture, and we're really pleased with the progress that we've been able to make, where every month so far this year has seen sequential decline in the actual fraud numbers overall. But ultimately, for us, it's about an improved and more secure member experience accessing our platforms. So there's no, you know, particular milestone that would stand out. It would just be continued progress along our strategy of delivering a member-first secure mobile experience.

If I can throw a follow-up, just as I think about the OBVA, obviously HSA access was not part of the final bill. As we think down, you know, think through the continuing resolution coming up here or other legislative opportunities or catalysts coming up? I mean, do you foresee any incremental opportunities to get HSA reform or HSA access improvement included in any of those future legislations?

Well, let me just speak to the existing opportunity, and then I'll ask Steve to comment on the future. What we're excited about is that what was passed is the largest HSA expansion for decades. And I think what we're being prepared for as we look at more individual families available under catastrophic ACA plans, bronze plans, that we are improving the actual experience. So we're redesigning our enrollment and our onboarding experience for these new types of consumers. So we're excited about the expansion opportunity. We're going to be leaning into it with an improved experience onboarding flow as well as marketing dollars to, again, prepare for a new set of customers that are now HSA eligible. So I think we're excited about what was passed, and maybe Steve can give a comment on how he looks at the future.

Yeah, so, Brian, look, we're actually pretty, as we've unpacked this, we're pretty excited about what was passed. And I couldn't tell from your question if you thought, There wasn't HSA expansion. There clearly was. I meant Medicare. Sorry, Steve. Oh, Medicare. Okay. I didn't hear the word Medicare. Yeah. So, yeah, Medicare wasn't in there. As we looked at it, it was probably a little bit of a smaller piece. We wanted to get that in there because there's, let's say, about 25% of seniors right now that are working or people that are Medicare eligible are working still. But then if you kind of have to chop that down, the people that are in that group that actually have an HSA are it's smaller. But, you know, we're going to keep hammering away at that. We do think that there was some interest in that. There was some questions about, did they want to really get into the Medicare question on this bill because it was so strictly tax-focused? They thought once they start, you know, opening up Andorra's box and dealing with Medicare, it could bring in some other questions and interaction and stuff like that. That said, though, everyone realizes that if you really want to save money for Medicare, because Medicare is A very expensive program, as we know, it's get people that can stay on their employer's plan, which is what would happen, to stay on the plan, and then that saves money for Medicare. Because if you work for an employer that offers you, I think it's more than 20 employees, that offers you both to stay on the plan and you enroll in Medicare, and then you have expenses, the employer's plan pays first. So that's a great way to actually address the cost of Medicare. And so as we kind of look at the next openings, whether it's another reconciliation bill probably next year or whether it's, you know, even some year-end bills that need to go through and things like that, we're going to be looking for every opportunity to expand, whether it be Medicare or some of the other provisions. But I'm telling you, the ones that went in that I highlighted in my comments, whether it's direct primary care, the telemed stuff, or certainly the bronze plans, we think there's a real opportunity here to go after it. And we're thrilled. As Scott said, it's the biggest expansion we've seen in 20 years. And, you know, we've been at it since day one. And so we've been following this very closely. Thanks for the question.

Thanks, Brian. The next question is from Greg Peters with Raymond James. Please go ahead.

Hey, good afternoon, everyone. So I wanted to go back. to your comments about how you locked in your rate for the next year. So I'm looking at your repricing schedule and I think it's 1.3 billion comes up this year, remaining in 4.1 billion next year. Should I think about that 4% relating to all of what comes due next year and Obviously, there's a 4% lock or 4% plus lock that you referenced. Does that relate just to the Enhanced Yield product, or is that to the traditional FDIC product as well?

Yeah, thanks for the question. So, yeah, you should think of it as we are locking the repricing of basic rates contracts that are maturing. So as we would expect, like all of the basic rates contracts that have been maturing, that the lion's share of those dollars will roll into enhanced rates at the time of their maturity. But also, as I said in the remarks, they are primarily centralized around January of 26, so Q4 of 26, fiscal 26, and January of 27th. so Q4 of 27, like we are locking specific basic rates maturities in those time periods. And as we said, sort of the average across those, the average across that was about a 4% lock on the five-year treasury. And as you said, yeah, we earn, if we can roll those to enhance rates, we earn about a 75 basis point spread on top of that. So effectively locking 475 on assets that are yielding currently 1.7 to 2%. Excellent.

Thanks for the clarification. And as my follow-up question, I just wanted to pivot to the HSA, the net new HSAs and AUM growth that you posted in the second quarter. Just wondering if there's any timing differences. I know Scott, you called out strong new enterprise wins and retention. Just curious if there's any nuances to the second quarter result you wanted to call out.

No, I wouldn't say there's any nuance to it. I mean, I think when we look at the $163,000, we are ahead of maybe where we thought we would be given the macro environment that we've highlighted here for the last couple of quarters. I think when you look at that level relative to historical quarters, this year looks a lot like fiscal year 24. And so I think in light of the macro, I think we're leaning in aggressively. I'd say that aggressiveness is going to show up, obviously, in the marketing dollars that we're going to be spending here in Q3 and Q4 to go after the expanded opportunity that we see through the expansion that we just talked about. That's why we're investing also in improved enrollment experience. And I think what we see from our existing client base probably reflects the macro, but I would say that we're encouraged by the signs that we've had with our enterprise sales pipeline and the retention that we've had from our existing customers, certainly coming through some of the challenges last year. So I feel good about how we're positioned to end the year or enter the busy season. So I think from here on out, to be honest, Greg, it's simply about our execution against the market opportunity that's going to be available to us. And so we can go after that within the things that we control, which I think the most important thing is the actual product experience itself and then how we're bringing our partners to the clients that we're trying to win business from. Thanks, Greg.

Thank you. The next question is from Scott Schoenhaus with KeyBank. Please go ahead.

So clearly the investments in driving app downloads are driving really nice gross margins. I think you mentioned 1.7 million members now have downloaded the app, which is in line with the data we track. Where do you see your ceiling here? I mean, can you expect to see 50% or more of your members using the app over the next several years? And then how should we think about the incremental margin opportunity here as you approach more broader adoption?

Yeah, I don't see an incremental necessarily a gross margin improvement from app adoption. What we're really looking for is simply active, engaged members. And so maybe similar as to you look at a 90-day active user, those that are actively engaged in the app, that's certainly what our target is. Very much in line with the mission of empowering healthcare consumers, we want them to be engaged. So we think the best experience that we're going to be providing over time is going to be in the app. We know that accessing any of our platforms is going to be required to download the app and go through the passkey authentication, that's going to be a better experience. And then what we're really driving is helping that member save, spend, and invest more seamlessly. And so as I look at it, it's really the improvement in the engagement and the experience. And so as you think about actual penetration, you know, just look at the number of account holders that we have. but it's really going to be those that are active that want access to their account are going to have to download the app to be able to access their account. So, you know, when we think about the penetration rate, it's going to be more reflective of how many active members there are against that account base.

That's helpful. Thanks, John.

The next question is from George Hill with Deutsche Bank. Please go ahead.

Hey, good afternoon, guys, and thanks for taking the question. I guess, Scott, it sounds like you talked about a disconnect between the employer market and employment trends growing slower than expectations, and at the same time you guys kind of outperformed expectations and raised guidance. So I guess the two things I'm wondering if you can throw some numbers around are can you talk about the order of magnitude by which kind of the employer market or employment seems to be growing slower and than you guys expected to see? And then kind of what's driving the outperformance? I can probably guess the answers there. It's going to be all the Team Purple stuff. But, like, I'm really interested in kind of the disconnects here is kind of the theme of the question I want to go with, like what you're seeing on the employer side versus the outperformance of you guys. Thank you.

Yeah, great. You know, I think, again, we've kind of highlighted just the macro environment overall, and I guess the HSA market is a function of, you know, new employment, job growth, people be able to move between jobs. And so when you look at the labor statistics that are showing employment growth down 40% year to date, year over year through July, you know, I think that would say that the macro environment for job growth has been tough. And so, but that being said, I think we've been able to lean into our sales pipeline, as well as our relationships with clients and partners to be able to go to market. Again, the 163,000 new HSAs is not a record for us. It's more muted than we would love to see, but we're still actually pleased with the progress that we're making. And so I'm not sure I see it as like a total disconnect because we certainly see and feel the macro and But what we're trying to do to offset that is focus on a great experience. I think also delivering a great service. This has obviously been a big focus of ours for the year. And I think one of the things that I'm most proud of is as you look at how we're serving our customers, as you look at NPS or CSAT, we're seeing nice improvement of both of those metrics, which is you know, those members that are contacting us how well we're serving, we're obviously doing that more efficiently on a year-over-year basis with the use of technology and having a better product experience, which I'm really proud of, which I do think contributes to us in our leadership position. You know, and then, again, I think as the market leader in this space, I would hope that we would continue to outpace growth of the market overall as the market leader. And I think so far this year, I believe that's what you're seeing.

I appreciate it. Thank you.

Thanks, George.

The next question is from Alan Lutz with Bank of America. Please go ahead.

Good afternoon. Thanks for taking the questions. Scott, I want to follow up on George's question there. And the last comment you made about outperforming market growth you've grown accounts by 7%, 8% year to date. Can you talk about how fast that you think the market is growing? And obviously the market growth rate has evolved over the past several years. As you think about the market's growth rate today, can you talk about your confidence that the market can sustain the growth rates and accounts that we're seeing this year into the next couple of years? I guess whether or not does that include contributions from the OBVB, just trying to get a sense of what your expectations are on market growth from here. Thanks.

Yeah. So, yeah, a couple of things. You know, I think where is it that we see the opportunity? Obviously, we talked about expansion of the market that happened as a result of OBVB. We're going to be going after that. We're going to be going after that, as I've said, through marketing, going after maybe a different set of potential, you know, members, also through plant partners. So we're going to be going after that through, you know, marketing, broadly speaking, top of funnel brand recognition, as well as, you know, through our traditional channels. So I think what we see is that the market is expanding. We'll see over the course of, you know, over the next several quarters how much that expansion from OBB shows up in terms of growth in the industry. I think there's a couple of things that are maybe more important even than new accounts. And if you look at the industry overall and you look at contribution levels, you know, we have lower participation across the industry for high deductible health plans. And so we're trying to introduce or lower the barrier for people to select high deductible health plans. We're doing a lot to educate our employers in a more difficult market this year to be able to manage their health care costs through smart plan design. And so our analyzer product, as an example, we're taking that to market as a really strong value proposition to employers. What ultimately we're trying to do is to get people to contribute at the max that they're allowed. Today in the market overall, only 4%. of members contribute at the max. So large market, under-penetrated in terms of those members that participate at the max. Across the market overall, only 8% of members are investors. We see a big opportunity for our members to become investors, and we've seen strong growth from our members to become investors. And so I think as you look at, Alan, us growing the business overall – There's baseline of the business that comes through account growth. But if we can have a more engaged consumer, engaged member, which we think is going to come through that mobile app experience, we're going to help them save, spend, and invest, which should lead to a higher contribution, higher account balances, higher investors, more engaged consumers. So I think all of those will drive growth in the industry overall above just account growth.

Great. Thanks, Scott.

Thanks, Alan.

The next question is from Mark Marcon with Baird. Please go ahead.

Good afternoon, and thanks for taking my questions. And let me add my congratulations. Really great quarter. I was wondering, when we take a look at the HSA cash, we've had a couple of quarters where it's dipped a little bit. And at the same time, obviously, HSA investments have been growing significantly. And I was wondering, to what extent would you say the dip in HSA cash is due to account holders shifting over to more investment behavior versus, you know, just dealing with higher healthcare inflation and therefore, you know, dipping into their accounts? And how are you thinking about the algorithm for HSA cash growth going forward?

Yeah, thanks, Mark. I can take that one. So I mean, the answer is a little bit of all of that. So obviously, as Scott just said, we want more than 8% of our HSA members to be investors. Investors are the most engaged with the platform. They have the highest balances. So there's certainly a piece of that of HSA members realizing that value and becoming investors. So we're growing the number of investors faster than we're growing the number of accounts. And then there's also a part of that is, like you said, like there's spending. We have contributions up. We have spending up. The other side of slightly lower cash balances or slower growth in cash balances, to put it better, is that that interchange continues to grow at faster than the rate of account growth. So, as Scott I think just summarized, the revenue growth story here is more than just how fast can we grow accounts, how fast do we grow HSA cash. It's all of the lines. We're going to grow accounts, HSA cash, invested balances, and spend through the platform. So, not really reading any more into it than that. And then, of course, the time of the year when cash inflows come in is at our fiscal Q4. So it is very, very lumpy. So sort of quarter-to-quarter views are to be held with a grain of sand.

Thanks, Mark.

The next question is from David Roman with Goldman Sachs. Please go ahead. Thank you. Good afternoon.

I appreciate your taking the question. I wanted to pick up on something that you said early in their prepared remarks about how to think through the implications of likely significant increases in premiums that come through next year and the potential benefit that you might see with increased HSA enrollment, and then how you contrast that with the comments you made around kind of current macroeconomic conditions. Is that kind of net us out in the same place around this mid-single-digit growth in underlying HSAs. How are you guys thinking about putting these kind of countervailing pieces together?

Yeah, so in a more challenging environment macro, I think a challenging environment for most employers is the rising cost of health care and health care premiums that for many employers have a hard time passing that along or bearing all of that. You know, when those healthcare costs are going two to three times faster, that's a challenge for anybody running a business and running a P&L. And that's where we think our role and the elevation of our message becomes more important. And so, you know, we've been out there having a conversation to be able to say, well, how is it that you can manage your overall health care costs better. And it's by having a smart plan design that has an HSA-qualified plan associated with it if you're an employer. We have plenty of case studies with employers that by doing that, they've been able to, you know, reduce that annual decline to manageable levels. I think in a more challenging environment that that value proposition becomes a lot stronger, David. And, you know, and so I think what we have found, at least historically, in more challenging macro times, the value proposition for HSAs becomes stronger. And so I think if you look at this business over a much longer period of time, then you would also look at the macro as this is just kind of like this current moment in time. Our most valuable members are those members that have been with us for a long period of time. And so this might be just one small layer in the onion for us overall. And so how is it that we continue to grow this business faster than today's environment? It's actually having all of our cohorts of members become more active and engaged. And I do think if we can actually drive the engagement metric, we'll increase contributions, we'll increase participation, we'll educate our employers more about how this is a valuable product in good times and bad, and then we'll become closer to serving the mission that this company was started for. You know, and so, again, I'm cautious of saying the macro environment has a long-term effect on this business. It doesn't. It's simply how all of our, you know, it's more a reflection of how do all of our cohorts combine over time by engaging on our platform.

Thank you, David. Thank you.

The next question is from Steven Valliquette with Mizuho Securities. Please go ahead.

Thanks, Dr. and everybody. Thanks for taking the question here. One thing I wanted to touch on a little bit, just to follow up a bit more on the forward contracts and the hedging. You talked about $1.2 billion notional signed since the last update. Just wondering, what are the gating factors on signing more of that? As far as just the pace of that, is it more just finding other willing contractors you know, third parties on the other end of the contract? Or is it more, is there still heavy-duty negotiation on that rate, you know, just over 4%? Just curious, you know, kind of how the ebb and flow of that goes, if you could provide any color.

Thanks. Yeah, sure. No, like, this is, like, Treasury forward curves is, like, the most liquid market on Earth. So, no, there's not a no-counterparty issue. It's just sort of, like, legging into – lagging into the hedge. So we sort of view it as sort of insurance contracts. We've traded $1.2 billion in total across many transactions over the quarter. And as I said in the remarks, you should expect that that amount will continue. You know, just sort of dollar cost averaging into the yield is how you should think about how we've executed that program.

Okay. Okay.

Thanks, Steve.

The next question is from David Larson with BTIG. Please go ahead.

Hey, congratulations on the nice quarter. Can you talk about the good increase in service gross margin? It looks like your costs were very good, including sales and marketing. Thanks very much.

Yeah, so I think, David, in service gross margin, yeah, you'll note that obviously our costs – on a year-over-year basis on the service side growing much slower than revenue. You know, and I think the effort there is efforts that we have across the board on delivering our service more efficiently in terms of power staffing. It also goes to the quality of the service that we're providing. You know, when we have a service that doesn't require our members to call us for difficult reasons, that lowers our cost to serve. We've also been making investments in technologies to become more efficient. And on that piece that I'm really excited about, I really feel as though we're at the very beginning of our journey there. You know, we talked a lot about claims automation and using AI in claims automation. We just got some awards on HSA Answers, which is leveraging chat on our homepage to be able to answer questions. And I think we're at the very beginning of our journey of automating other manual and repeatable processes through technology that should, over time, reduce that service cost even further. In many respects, I believe that we're at the beginning of our journey of modernizing the product and modernizing the service experience with AI. And so I'm optimistic that we can continue to make improvements there.

Great. Great. Thanks very much. And then even though you're performing really well, the stock seems to be trading sort of sideways. I think that maybe there's some concern if, like, let's say interest rates decline by 50 basis points by the end of calendar 25, and let's say 75 basis points or 100 basis points by the end of calendar 26. Can you sort of size what impact that could potentially have on your book, like perhaps not going to study all revenue? Would that impact that $4.1 billion? So the $4.75 could maybe go to $4. on that 4.1 billion for fiscal 27?

Yeah, I mean, I think the short answer is we're not going to get into those sort of modeling questions on the call here. But yeah, I mean, obviously, we replace rates to the extent we haven't hedged them. The placement rates will be done on the day that they're placed. So it matters what the five-year treasury is on the day that assets are placed. So, you know, you can all have your own forecast on the direction of the five-year treasury. Like, that is not what the forward market says the direction of five-year treasuries are today. So, again, we're not going to get into all of the speculating cases.

Okay. Thanks, David.

Yep. The next question is from Stan Berenstein with Wells Fargo Securities. Please go ahead.

Yes. Hi. Thanks for taking my questions. First, maybe for Steve, on the ACA opportunity, do you just have any initial expectations as to, you know, the 7 million opportunity that you have in front of you? You know, how much of that do you conceivably expect to convert into an HSA next year? Any thoughts on that? And related to that, Jim, do you plan to break out the lives that you capture from the ACA plans separately from your regular HSA accounts? Thanks.

Do you want to answer that first, Jim, and then I'll – I can answer the easy question first is no. We will not separately bring it out. And HSA is an HSA.

I thought your answer would be not free. So, Stan, on ours, you know, I mean, we think – I mean, the good news is there's pretty good data out there because there's – the public use files not only show that there's 7 million people In these bronze plans right now, it also shows how many people are in the silver plans, but none of the – I mean, we went through them pretty meticulously, and as I mentioned in my comments, that very few, less than 10% that we could find of the bronze plans that are offered right now in market are currently HSA-qualified. And then, so if you, you know, let's say they already were, 10% were, I mean, you'd give a little bit of a haircut, but then you give it a haircut so it's down to households, and then you give a little bit of a haircut based upon households that could actually pay to fund the account. But just in case anyone that's called doesn't realize this, if you've got money to go pay for a bronze plan, you're not, like, typically Medicaid eligible and things like that. Otherwise, you're just going to Medicaid. And these are a lot of the folks that we live and work with, right? These are Everyone from doctors and lawyers have small practices that need to have coverage. They've got assets to protect. And so they'd much prefer to be covered through the ACA to Uber drivers, gig workers, things like that. These are people that have assets. And so the question is, is how many of them can we capture? What's the real market? I think in households, as I said, you know, it could be You know, if you add that to the other expansions with the DPC and the telemedicine, we can get three to four million households right out of the gate that we can go after. Now, it's going to take some work because you need to first educate these people that it's like, hey, congratulations, you've got a bronze plan. And now, if you have any medical expenses at all, doggone it, run it through the bronze plan. I mean, as we've repeated several times on this call, that, you know, the way we do business is we help people save, spend, and invest for health care. And obviously, we'd love to get those dollars accumulating. But the best way to get them to accumulate is to help people understand that if that money touches down in an HSA stand for even like a day and then rolls off to pay for something, they're going to get a 30% to 40% tax savings on that dollar right then. Or let's say savings, 30% to 40% savings on that dollar. It just gives them incredibly more purchasing power to pay for their health care. And it can be for obviously... typical healthcare things like meds or surgery or doctor visits, things like that. But it can also be for some of the things we've talked about in other settings where, you know, people are now pretty interested in, you know, can I go and get a GLP-1 for a good price? And can I use this money? And so we're absolutely committed to finding these people, letting them know that, yes, you're in an HSA-qualified plan. Yes, you can open and fund that account right now, even if it's a little bit later. We're going to continue our marketing efforts because we have our health fund partners who are going to be helping us with this too, and we'll be funding these people and getting them to fund it. The health plans and the doctors and the hospitals are totally aligned with this because they want these people to be able to pay their out-of-pockets as well. So we're going to tap every channel we can find, and we have the broadest channel in the market. to find these folks, get them to open the account, and fund it. Now, all that said, I can't give you a number, and you know we're not going to, but I'm telling you, we're talking about, you know, several million. We don't know exactly how many millions. We'll find out more American families that now can immediately open an HSA, and doggone it, we've been working on this for 20 years to get this type of expansion. So, I don't know. We'll be seeing it. We'll be watching it, and we have resources. that we will deploy. We've already deployed them as far as building out our solution. And we're going to continue getting ready on the marketing spend. And if it's successful, we'll spend more. And we'll test it. We're going to learn a lot. And we're really excited about this opportunity, Stan. Thanks for the question.

Thanks, Stan.

We'll see you tomorrow. Thanks so much.

The next question is from Matthew Inglis with RBC Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my question. You kind of touched on this before, but on the AI initiatives, you've talked about the expedited claims and the agentic AI voice channel. Can you talk about the magnitude of the cost benefits from these rollouts? How much of that is maybe already playing into the year-over-year decrease in service costs? And then outside of those, what are the other big opportunities remaining for further cost reduction through automation and AI?

Yeah, great question. So as I said, I really believe that we're just on the very beginning of our journey on AI. So we've already been able to deflect costs through claims automation using AI. We're going to be investing within the framework of our tech and dev spending on APIs and data to unlock further opportunities around AI pretty much in every function of our company. We're looking at AI solutions that can automate any process that is a repeatable process that can be run on data across AI. I think the biggest opportunity that we see is in the service center because when we look at a lot of the things that some of our members are calling on us on, a lot of those interactions we can automate and take care of our members instantaneously through AI. And so, again, I don't think, you know, we're not going to provide guidance on where we think that opportunity is. But, again, probably where I see the biggest opportunities within the enterprise really starts in service center, expands in terms of us becoming more efficient in our product and development, in terms of our engineers be able to write code faster, more efficiently, and and then for us to be able to envision other areas within the company that we can do, you know, smarter. So I think overall what should be the net benefit of that, an improved experience, an enhanced experience, a faster experience, and a more efficient cost structure to do so.

Thanks, Matt.

This concludes our question and answer session. I would like to turn the conference back over to Scott Cutler for any closing remarks.

Well, hey, I want to thank everybody for a really engaging conversation there. I mostly want to thank our teammates for these remarkable record results. We are thrilled about the opportunity in front of us. We have a lot of execution for the second half of the year and into next year as we reach and influence and help more of our clients and members realize the benefits associated with HSAs. I'm confident and energized to fulfill our mission of saving and improving lives by empowering healthcare consumers. So thank you, everybody, for participating in this conference call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.